The Finance Ghost: Pick n Pay is eyeing fresh meat to enhance strategic customer offering

By The Finance Ghost

2 Jul 2023

Here’s a story to sink your teeth into, especially if you’re a fan of a chop ’n’ dop.

Pick n Pay is trying hard to improve the fortunes of its core grocery business. This is called Project Ekuseni and it entails a reworking of the customer offer. As part of this strategy, the group has decided to acquire the Tomis group of companies for R340-million.

This is nowhere near big enough to move the dial for the broader group, but it does give us insight into Pick n Pay’s strategic thinking. By taking ownership of this sizeable feedlot, abattoir and meat packaging plant located near Wellington, Pick n Pay aims to gain greater control over its red meat value chain and enhance its customer offering. You can easily imagine improvements in pricing and consistency in the supply chain.

A further important point is that Pick n Pay operates a substantial franchise footprint. This is an opportunity to supply franchisees and increase Pick n Pay’s share of the economic profit pool.

Unfortunately, there is no information available regarding the profitability of the Tomis business or the specific multiple that was paid, so I can’t opine on that. But I can opine on the structure of the payment profile, with R323-million payable upfront and only R17-million payable after three years.

It would’ve been better to see a proper earn-out structure here, as is common in private company acquisitions.

Exxaro is between a rock and a hard place

Exxaro recently provided a pre-close update on the six months ending in June 2023. During this time, there has been a significant drop in export coal prices, falling to approximately $127 a tonne compared with $265 a tonne in the same period last year. However, there is some positive news, as iron ore fines prices have increased from $101 to $117 per dry metric tonne.

Coal production and sales volumes have declined by 4% and 7%, respectively. The demand from Eskom has been lower (-6%), and logistical challenges at Transnet have affected exports (-6%). Exxaro just can’t win, facing disappointments from the government on various fronts.

On a brighter note for cash flows, capital expenditure in the coal business has decreased by 8% after completing several key projects last year.

Although Exxaro has a significant net cash balance and is well equipped to withstand short-term pressures, it really would do wonders for our local mining sector if government infrastructure was working properly.

And on the topic of South Africa…

When you hear the signal, it will be gatvol o’clock at Argent Industrial. Beeeeeep…

It is rare to see a company give an unfiltered view on local conditions. Corporates tend to play it safe, cognisant of relationships with government and regulators.

Not so at Argent Industrial, where the gloves are off.

In what may well be an autocorrect of another word starting with F, Argent described the domestic consequences of a “perfect Fun Show put on by the current elected party” and how this has made an “absolute mess” of local markets. It goes on to say that this is inspiration to build operations and production elsewhere in the world.

And “elsewhere in the world” is exactly what the group is doing, with offshore performance as the major driver of 22.5% growth in diluted headline earnings per share in the year to March 2023.

At this stage, Argent generates roughly 57% of its business in SA. This contribution is likely to decrease over time as the company focuses its efforts offshore. DM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.

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Exxaro is between a rock and a hard place

And on the topic of South Africa…